For a number of years, Revolutionary Industrial Properties ( IIPR -2.67% ) was the one publicly traded REIT to specialize within the operation and leasing of actual property in medical marijuana properties. Being the primary and solely firm within the area paid off massive for IIPR and its shareholders, myself included. IIPR produced an annualized return of 67% for the previous 5 years, and share costs grew over 1,000% throughout that point.
IIPR’s explosive progress has left some buyers feeling they missed their chance to invest on this budding sector, however IIPR has new competitors. NewLake Capital Companions ( NLCP -7.18% ) is the newest publicly traded REIT to supply medical marijuana actual property leasing. Whereas the corporate could be very a lot in its early progress stage, may this imply IIPR is in hassle?
Picture supply: Getty Photos.
A better have a look at NewLake Capital Companions
Based in 2019, this Connecticut-based firm went public in August 2021. NewLake Capital, like IIPR, makes use of a sale-leaseback construction to amass properties. It purchases property from an current medical marijuana operator after which leases the area again to them utilizing a long-term web lease. This investing mannequin provides liquidity for the operator, which may be fairly difficult, given marijuana remains to be unlawful on the federal stage, whereas offering NewLake with long-term money stream secured by actual property.
Initially of 2022, NewLake had 29 properties in its portfolio positioned in 11 states, for a complete of 1.5 million sq. toes of leasable area. Its 11 tenants, together with a number of publicly traded marijuana operators, are primarily within the cultivation business, with the remaining 10% within the retail area. Occupancy and hire collections stay at 100%, one thing the corporate has maintained since its inception in 2019.
How NewLake compares to IIPR
The businesses are very comparable in that their enterprise fashions and portfolios function in most of the identical states and markets and derive earnings in the identical method. The large distinction is the size and measurement of the businesses. IIPR owns or has an curiosity in 105 properties in 19 states totaling $7.9 million sq. toes of leasable area. But it surely wasn’t at all times the enormous we see at present.
When IIPR went public in late 2016, it had only one property in its portfolio and $30 million in dedicated capital. In comparison with NewLake Capital, which has $345 million in dedicated capital and 29 properties in its portfolio at present, NewLake is already additional established than IIPR was in its early years.
NewLake Capital additionally has the advantage of having zero debt and $168 million of money available — placing it in a strong place for enlargement utilizing a confirmed enterprise mannequin for progress. IIPR, whereas at a really low debt-to-asset ratio of 15%, nonetheless has debt obligations, having a complete of $472 million in debt and $406 million in money and money equivalents available.
Picture supply: Getty Photos.
Is IIPR in hassle?
Proper now, it seems NewLake Capital could be very a lot on its solution to following the footsteps of IIPR. It is attaining the identical explosive year-over-year progress momentum as IIPR is, with NewLake’s revenues up 138% yr over yr (YoY) as of Q3 2021. Funds from operations (FFO), a necessary metric for valuing REITs, went from a web lack of $1.67 per share to a web revenue of $0.80 per share for the 9 months ended 2021.
However there isn’t any assure this momentum will proceed. The large enhance in 2021 efficiency was primarily on account of a merger that helped the corporate enhance its portfolio by 19 belongings and generate $2.5 million in income progress. Fourth-quarter 2021 and full-year earnings will present extra shade on its efficiency, however its earnings within the new yr, with out main acquisitions in its current historical past, will higher point out if it might preserve this accelerated progress. NewLake is getting a a lot later begin, which implies it’s confronted with elevated competitors, not simply from IIPR but additionally marijuana SPACs and non-publicly traded corporations.
Competitors is nothing new for IIPR. It has been competing with operators within the non-public area its total profession. NewLake being another funding possibility might drive some funding {dollars} away for a brief interval, however actually the businesses provide two various things. IIPR provides reliability, a powerful monitor document, and a longtime portfolio for buyers. NewLake provides progress potential, however with a number of dangers and unknowns by into the combination — a far cry from the soundness IIPR provides.
Progress alternatives within the cannabis industry might not be as massive as they had been 5 years in the past however are positively nonetheless there. Till marijuana is permitted on a federal stage, one thing that is not anticipated anytime quickly, there shall be demand for the companies supplied by each NewLake and IIPR.
NewLake’s IPO, share costs have fallen 20% yr to this point. A part of that is poor timing, given the volatility available in the market proper now. In the meantime, IIPR share prices are down 29% year to date.
Which means each are buying and selling at a notable low cost. For extra risk-tolerant buyers, at present’s deflated share worth may very well be an excellent time to purchase, however I personally shall be ready to see how NewLake’s efficiency progresses within the coming few quarters earlier than investing.
This text represents the opinion of the author, who might disagree with the “official” suggestion place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis – even certainly one of our personal – helps us all assume critically about investing and make selections that assist us grow to be smarter, happier, and richer.
